Autumn challenges for Clegg and Miliband

As he contemplates the next parliamentary year from the comfort of his Spanish holiday, the Deputy Prime Minister will have plenty of time to consider the perils of coalition. With a stand-off between Nick Clegg and David Cameron over constitutional reform, it is becoming increasingly clear how little the Liberal Democrats have gained from being in power with the Conservatives.

There are two reasons why this is so. First, Clegg failed to secure unconditional support for key policies from Cameron. He won a referendum on the alternative vote, but had no guarantees that his position would not be trashed by his coalition colleagues. Instead of just having a referendum, he should have made boundary changes conditional on AV being passed, and put both on the ballot. Now, rather belatedly, he has chosen to link the constituency carve-up to the failure to get Lords reform through. It looks petulant done this way, and does Clegg few favours in the eyes of voters.

But the second failing was not to insist that the Conservative Parliamentary Party be asked to endorse the coalition agreement in the same way that Clegg gained the support of his Liberal Democrat colleagues. This has allowed many Tories to take a pick-and-mix approach to its measures. This was, of course, as much Cameron's failure rather than Clegg's, but it was a weakness of the whole arrangement.

Of course, a bigger problem for Clegg is that on measures where his party gained seats, notably tuition fees, he has accepted a position the exact opposite to that which he argued for during the election. The concessions on repayment thresholds may make the loans more attractive to some, but have made the finances of higher education less sustainable. Clegg would have been better insisting on a lower cap on fees which might have appeared less daunting to potential students in the future.

Where the Lib Dems claim some credit for policies delivered - the pupil premium and a higher tax threshold - it can plausibly be argued that they are delivering policies that most Tories willingly embrace. The pupil premium also featured in the Conservative manifesto. But. so far, its failure to link with a national funding formula and to recalibrate the much higher premium inherited from Labour, means that it is often being used to mitigate cuts elsewhere in the budget rather than for proven measures that could tackle achievement and aspirations among target students.

If he is to regain some of the credibility he enjoyed before the last election, Clegg needs to be ready to revisit the coalition agreement in the autumn, and establish some key priorities for the second phase of the government, some of which should reflect the reality that George Osborne's economic policies are not working as intended. Top of the list should be a serious investment package in national infrastructure, one that starts to have a real impact on the economy, and a stimulus to service industries that pump money directly into the UK economy, perhaps through targeted VAT reductions for tourism-related industries or a strong incentive package to boost UK education. He should also try to put a halt in both cases to the Home Office's unstinting efforts to deter tourists and students from spending their money in Britain.

Meanwhile, Ed Miliband has benefited from the coalition's woes, but still lacks a strong enough policy on the economy and taxation. His challenge for the autumn is to put flesh on a policy that goes further than heckling 'I told you so' at the Chancellor. Ed Balls has argued for VAT cuts, but they need to be targeted on services and industries that are largely home-grown if they are to improve growth, not add to the trade deficit. Stella Creasy has rightly argued for a wholesale bottom up review of all public spending, with value for money at the heart of it. And the focus on any extra investment must be on infrastructure - both small-scale, such as restoring individual school capital budgets, and large-scale, including sorting out London's airports. Miliband has gained stature in the last year: this autumn is the time he needs to translate that into economic credibility.

This economic setback is Osborne's responsibility

George Osborne has finally been found out. Yesterday, Richard Lambert bemoaned the absence of any serious growth strategy in government. Today's ONS data confirmed what one instinctively felt: the economy has been contracting rather than growing. Of course, the weather in December will have had a depressing effect on some retail trade. But this setback is about much more than that. It reflects the absence of any serious effort by the government to promote growth (leaving aside Vince Cable's BRIC tours) and an utter ignorance about the knock-on effect of cuts that have already been made on the private sector.

That latter point is particularly important in the absence of the former. As soon as the coalition was elected, it set about breaking contracts and tearing up purchase orders across Whitehall. These were not contracts with their own public sector employees, but with firms in the private sector. They may have been in areas like communications, advertising or other consultancies. But they are a part of the economy, and their abandonment has caused a significant contraction in a service industry that relies on both public and private contracts. At the same time, capital projects including many school building programmes were scrapped, even though they were well advanced. That had a significant impact on the construction sector.

The issue is not whether or not those cuts should have been made, or even the size of the cuts through to 2015. Any government would have cut back on consultants, and probably slowed capital building projects. Rather it is the way in which the axe fell without warning or planning, and with little chance for those losing out to find alternative work. At the same time, there is no evidence that the private sector is yet ready to take up the slack for the much more severe cuts that will have an impact from April. The problem, in other words, is that the government has wielded the axe without thinking through the consequences or how to mitigate its reductions in public sector contracts. And, the less growth there is in the private sector, the greater the cuts they will make in the public sector to compensate for lost tax revenues. And that is why the coalition should take the blame for this contraction in the economy, and stop trying to blame the snow or the last Labour government. It is George Osborne's responsibility now.

The right economic approach for Labour

There's plenty of gloating about a leaked internal document from Labour (£) where insiders recognise that the party lacks economic definition yet and needs a clearer approach to tackling the coalition cuts. Such gloating is premature. If anything it suggests a degree of real understanding about the potential weakness of the party at a time when it has just overtaken the Conservatives on today's Populus poll but growth figures are better than predicted by a gloomy city (albeit down on Labour's last quarter). And that is a good thing. Labour needs to box clever not only the economy - where it has failed to allow a narrative to emerge that blames the party for the size of the deficit and ignores the penury into which millions of savers would have fallen had Labour allowed the banks to collapse as George Osborne advised - but also on health and education. A first step in doing so is recognising one's weaknesses. A second step, which some frontbenchers including Alan Johnson and Douglas Alexander on welfare have already recognised, is to fight the coalition strategically and not wholesale. The third one is having the right policies for the next election. So, embarrassing though this leak may be, it is a sign that the party is not retreating into an opposition comfort zone. That approach needs to be followed through across the front bench - without the leaks, perhaps.

The economics of Nimbyism

The October Spending Review is likely not only to have a severe impact directly on public sector jobs, but also indirectly on the private sector through reduced spending power and a loss of public contracts. That is a given in George Osborne's plans. But there is also an assumption that the private sector will still be able to step in to fill the gap created, generating sufficient growth to outweigh the negative impact of the cuts.

That theory might be fine if it were not for three deeply damaging protectionist policies that are achieving exactly the opposite effect, and which are set further to stunt prospects for growth. In a welcome breath of fresh air, Vince Cable has told the Financial Times this morning that the ludicrous cap in non-EU skilled migrants is having a real impact on key economic sectors, echoing views expressed by the London Mayor Boris Johnson. Meanwhile, Damian Green's zealously populist embrace of Home Office antipathy to overseas students - who contribute £5 billion a year to the UK economy - not to mention the ties that are created with many graduate entrepreneurs afterwards - is likely to see them turn to other countries with less short-sighted attitudes instead.

But there is a third element that is exemplified vigorously in today's Bristol Evening Post: the coalition's support for Nimbyism over the national interest, whether in the expansion of Heathrow Airport or in major economic developments. What the Post accurately describes as a 'rutted former tip' has been given the status of a 'town green' because 22 local residents successfully appealed in a planning inquiry against a £150 million investment in a world-class football stadium at Ashton Vale that could have provided 6,000 jobs and £150m if the World Cup comes to Britain. Yet far from reducing the impact of such Nimbyism, the coalition in a misguided piece of localism has handed far more power back to small groups of residents and abolished the independent Infrastructure Planning Commission, to the dismay of industry.

Combined with an appetite for cuts that has already choked infrastructural investment in schools and transport, it all amounts to a recipe for economic stagnation. Let's hear more from those in the coalition who recognise this reckless folly for what it is.

Short-sighted building cuts

Modern school buildings - over 1100 new schools were built since 1997 - remain one of Labour's great educational legacies. And while there may well be savings to be made in the Building for the Future (BSF) programme through more standardised plans, it is deeply worrying to see the coalition treating the abandonment of school building plans almost as a badge of pride.

While there may be a good case for some cuts in revenue spending, the cuts in buildings investment cannot but hinder the recovery, damaging the construction sector. This is an investment in the future which should not be treated as an optional extra. George Osborne effectively acknowledged in his Budget speech that previous Tory governments mistakenly cut capital investment during previous recessions. It remains to be seen how the capital programme emerges after this review of BSF: but a return to the days of crumbling schools in the 90s would not only be bad for education, it would be bad for the economy and future growth.

No wonder business confidence is ebbing from the economy.

This post also appears on the Public Finance blog.

Wise counsel from Peter Mandelson

My dealings with Peter Mandelson may go back a little further than Matthew Taylor - I worked as a temporary Labour press officer during the 1987 election with a desk just outside his office in the smoky Walworth Road complex then occupied by the People's Party - but I entirely share his analysis of the business secretary's speech in New York. It is just the sort of speech we need from Labour ministers at this time.

Advance billing for his speech to the Council of Foreign Relations suggests that he will say that governments in a recession

"have to be right, even if it means more time before we are seen to deliver.....As nations, we must keep a steady nerve and cool judgement, constantly refining our policies as necessary."

According to a briefing to the Guardian, he will say Labour is in a tough place politically as he urges his cabinet colleagues against daily initiatives to combat the recession, as they only raise false media and public expectations of instant results, while the end of the recession simply cannot be forecast. There are no manuals, blueprints or precedents to dictate what to do.

With today's Mori poll putting the Tories in a 20-point lead, this is wise counsel. The public wants to see results from the big injections of funding and VAT cuts already made rather than new ideas each day. It wants the banks to lend again and more job security. The government needs to show how it has made a difference - and, given that Germany and Japan are clearly also very badly affected by the recession, there is still a case to be made for explaining the international aspects of the recession without underplaying what is happening here.

Mandelson recognises the need for honesty from the government both about the scale of the problem, what we know, what is being done and the chances of success. I don't share the Cameron desire for a full-scale mea culpa from Gordon Brown, but an acknowledgement that politicians of all colours - including the Tory front bench - supported the deregulated environment that led to the City boom and bankers' irresponsibility would not go amiss.

As Matthew says, there is a sense that the Mandelson speech supports his view that the government needs to focus on governing rather than actively maneouvering over the next election (or worse, a post-election leadership contest), when the latter is not only pointless, but self-defeating (indeed taking a more stately position would show a marked contrast with Cameron's petty point-scoring).

And in a timely warning to colleagues about avoiding populist panic measures, Mandelson also calls for some restraint there too.

"Governments must neither ignore the public's anger and impatience, for example on bank bonuses, nor be pushed into hurried judgments because we fear accusations of indecision."

We need to hear more along these lines.

Brown's rising stock

There is no doubt that Gordon Brown's stock has risen greatly as a result of his decisive action in the financial crisis. Being abroad and relying more on international news outlets makes this abundantly clear. Today's announcement by President Bush shows that Brown's solution of government buying stock in the banks is the preferred US option too. After a good conference speech and a strong reshuffle, it can surely only be a matter of time before the polls properly reflect this reinvigorated leadership.

The value of property

Buenos Aires - To hear a brilliant talk by the great Peruvian economist and intellectual Hernando de Soto at the opening of the International Bar Association conference here last night (my wife, Sarah, is the lawyer). De Soto explained the current financial crisis in terms of property law: when we knew what a bank effectively owned, we knew that there was a legal truth in its assets. With the reselling of sub-prime mortgages, we have no such guarantee. For much of the world, where property ownership remains unclear - it is, apparently, true of 60% of Peruvian land - there is a permanent sub-prime crisis, and economic development is hard to measure accurately. Only when countries have clear property rights can they become developed nations: yet the developed nations have squandered that strength in recent years. De Soto was clear that it is only when we know that banks really own the assets that they say they own can we move beyond our current predicament. It was the most lucid insight into the current situation I have yet heard.

How doomed are we, really?

As Alastair Darling does his best to emulate the doomladen tones of Frazer of Dad's Army fame with his statement that these economic times are the worst they have been for sixty years, Sean O'Grady offers a useful historical perspective in today's Independent on Sunday:

Even the most pessimistic independent forecasters don't see the economy in 2009 contracting by more than say 0.25 per cent. The worst years for growth since 1948 (when the economy shrank), were: 1991 (-1.5 per cent); 1980 and 1981 (-2.2 per cent and -1.3 per cent); and 1974 and 1975 (-1.7 per cent and -0.6 per cent). Few expect things to be quite as bad now: does Mr Darling? Current inflation, at 5 per cent or so, is not a patch on August 1975's record of 26.9 per cent. In terms of the financial system, the last time the banks were unable to provide credit to the wider economy on any scale was during the secondary banking crisis of 1973-74, a short-lived and minor affair, compared with our $1 trillion global meltdown. Then again, Mr Darling could be thinking of the Depression of 1930 to 1932, the last global credit crunch. Then the UK's economy declined by 15 per cent, many banks collapsed and the world was left with Hitler and the road to Armageddon.

But Darling was surely right to say:

We really have to make our minds up; are we ready to try and persuade this country to support us for another term?

I can think of better ways of going about it, myself.

The real truth about immigration

After today's Lords' report on immigration, it was good to see the ubiquitous Sir Andrew Green aka Migration Watch having the logic of his arguments properly examined on Channel 4 News tonight. When a First Bus boss explained that her company had to recruit Polish drivers because despite its many training schemes, it couldn't recruit British ones (certainly the case in Bath), Sir Andrew cheerfully suggested raising the fares to pay much higher wages. When the man from the Care Homes Association explained that its wages reflected what councils pay, hence its 30 per cent overseas workforce, pompous Sir Andrew prescribed a hike in council taxes. To what extent their Lordships factored these matters in their deliberations is unclear. But I do hope Sir Andrew's true views are exposed rather more fully in the Daily Mail and on Today in future.

A question of trust

"Is it any surprise -after Iraq and ten years of spin and lies - that the public don't trust Labour on Northern Rock?", asks Stephen Glover with a mixture of synthetic anger and wishful thinking in today's Daily Mail. Sorry, Stephen, better luck next time. First, today's ICM poll for the Guardian records Labour on 40% and the Tories on 32%, with Brown enjoying huge public confidence as PM and Cameron sinking below Ming Campbell in personal approval ratings. Then, a Times/Populus Poll not only finds that most voters blame Northern Rock or the American mortgage market for the problems of the last few days, it shows public trust for Brown/Darling on the economy at 56% compared to 18% for Cameron/Osborne. Clearly the public still trust Labour in a crisis, and were deeply unimpressed with Cameron's pathetic attempts to talk the economy down last weekend.